9/23/2010 @ 2:00PM

In Zuckerberg We Trust

Some days Facebook founder Mark Zuckerberg just wants to pull up his hoodie and hide. Even at his own company’s snack station Zuckerberg gets buttonholed, this time to discuss The FORBES 400. “If I could, I wouldn’t even be on that list,” he says, shying away.

You can only imagine how much he’s dreading Oct. 1–when The Social Network,
Sony
‘s dark mythologizing of the Facebook creation story, hits thousands of screens across America. It casts Zuckerberg as a haunted mogul, à la Citizen Kane, who chooses his company over his friends. Producer Scott Rudin says he was attracted to the “coming of age” story because of its “Horatio Alger quality.” Zuckerberg calls it “fiction” and wishes the film had not been made in his lifetime (although he’s not suing). He declined to discuss it with FORBES.

But Zuckerberg has bigger things to worry about than Hollywood. A poll conducted for FORBES by Zogby International finds 63% of Americans don’t trust Facebook with their personal information. Yet more than 90% of those polled are Facebook members. Navigating that paradox is the central problem plaguing Zuckerberg right now, as privacy activists and lawmakers circle his company, threatening new regulation that, if overdone, could derail its future.

They should tread lightly. At 26 Zuckerberg has built the most promising communications business since the Bell System, a network of 500 million customers who announce births and deaths, shoot videogame zombies, swap photos and reconnect with (and ogle) high school sweethearts 30 billion times a month, three times last year’s rate. One Maryland woman finds Facebook so essential that she is suing the company for cutting off her access, alleging breach of contract, violation of her constitutional rights and violation of the Americans with Disabilities Act (she claims bipolar disorder). The company will pull in revenues approaching $2 billion this year–from less than $300 million in 2008. Chances are you used Facebook today.

Amid the worst recession in a generation, Zuckerberg has also created formidable new wealth for himself and thousands of others, perhaps $35 billion since Facebook’s inception in 2004. (Elevation Partners, an investor in FORBES, has a big stake.) Zuckerberg is number 35 on The FORBES 400 this year, with a net worth of $6.9 billion. Former partners Dustin Moskovitz, 26, and Eduardo Saverin, 28, made the list as well. Lots more early stakeholders have cashed in another $150 million in 2010, says SecondMarket, which brokers private-company shares. Facebook employs 1,700 people.

Yet the FORBES/Zogby poll found that 63% of Americans don’t know enough about Zuckerberg to form an opinion of him. The son of a dentist father and a psychiatrist mom, he grew up in Dobbs Ferry, 40 minutes north of New York City. A programming savant, Zuckerberg went to Harvard and coded the first generation of Facebook in his dorm room at age 19 to help undergrads communicate online using their real names, a revolutionary idea at a time when anonymity dominated the Internet. Within a year the project tore through America’s colleges, and Zuckerberg decamped to Silicon Valley in search of talent and funding to expand his company. He opened Facebook up to anyone with an e-mail address in 2006.

The road has had its potholes. Zuckerberg settled one suit over the site’s paternity for a reported $65 million in 2008. In June a small-time Internet entrepreneur who once hired Zuckerberg to do some programming laid claim to 84% of Facebook. The company calls the suit “completely frivolous.”

It’s easy to see why people want in, given the company’s amazing trajectory. Three years ago, in the hopes of fertilizing new businesses that would, in turn, draw more users to Facebook (then with 24 million people in the network), Zuckerberg allowed outside programmers access to Facebook’s software code. Within a few weeks games and other apps from contributors appeared, and new Facebook signups spiked, along with the amount of time people spent on the network.

Today there are more than 1 million developers working with Facebook data worldwide, mostly small-timers hoping to hit it big like Zynga, the game company that has hooked 60 million people on Farmville. Thanks to the sale of virtual goods, like tractors, cows and weapons for a buck or two each, these fashionable, if vacuous, distractions have become a $1.6 billion business. Zynga is worth perhaps $5 billion, making its founder, Mark Pincus, a contender for The FORBES 400 (see “15 in 2015″).

“It was like when
Google
started selling ads–overnight, we knew that it was a new business model,” says Bret Taylor, Facebook’s chief technical officer and a highly regarded veteran of Google.

Now Facebook is becoming a marketplace for everything from clothes and books to music and insurance. Simple premise: Who would you trust more for a recommendation, Google or your friends? The company even established its own monetary system–Facebook Credits–to ease transactions (Zuckerberg takes a 30% cut). Now 80 of the world’s 100 largest advertisers are on Facebook, the company says. Retailer
Urban Outfitters
has a section on its e-commerce site that offers the products voted “most liked” by Facebook users. Tax prep company
Intuit
credits Facebook with a 15% increase in sales of its TurboTax, in a year when 2% fewer folks filed tax returns.

As a result, investors are comparing Facebook to Google (market cap: $152 billion) and panting for an IPO. “There is a lot of belief that social connections could be that big for advertising, and e-commerce is still to come,” says Jeff Thomas, who brokers Facebook shares for Second Market.

But commercial success sparks privacy concerns. Zuckerberg has become a prime target of activists who fear corporate exploitation of shared personal information. “Facebook is Exhibit A in the need to update our privacy laws,” says Marc Rotenberg, executive director of Washington’s Electronic Privacy Information Center. EPIC has two complaints against Facebook with the Federal Trade Commission regarding “their unfair and deceptive trade practices in the way they change their privacy rules and the way they modify their terms of service.”

Last December, for example, the company rolled out new personalized privacy settings, giving members more specific control over who could see their photos and updates. The Electronic Frontier Foundation, among others, quickly accused it of duping consumers because the feature’s default setting allowed for “Everyone” to see users’ photos and profile information. A host of privacy groups filed a complaint with the FTC. When some of Zuckerberg’s private pictures became public, bloggers took it as evidence of overwhelming complexity, though in practice altering the settings took just a couple of minutes. Facebook responded by saying that it had spoken to regulatory groups, including the FTC, before launching the changes.

Nonetheless, the p.r. fiasco hurt Facebook’s reputation and not for the first time. The worst ding was the bungled introduction of a feature called “Beacon” in late 2007 that showed your Facebook friends what you were buying online. Even longtime fans of the site found it too intrusive. MoveOn.org rallied 50,000 petitioners to call for changes. Zuckerberg’s immediate response was, in essence, Get over it. When that didn’t fly, the company backpedaled.

Since then Washington has sharpened its talons. Earlier this year four Democratic senators, including Chuck Schumer (D–N.Y.) and Al Franken (D–Minn.), wrote to Facebook suggesting it grant more control to its users over their own information, and urging the FTC to investigate. That agency is also considering a “do not track me” system for online data, much like the one preventing telemarketer calls.

Proposed legislation by Representatives Rick Boucher (D–Va.) and Bobby Rush (D–Ill.) goes further by forcing users to sign agreements whenever a website collects data about them. Media companies and advertisers worry the system would be clunky and unworkable. The bills may come to a vote by the end of the year.

All of which puts Facebook in a bind: The future of their service depends on the wealth of information they collect about us, but every attempt to monetize it draws thunderbolts from privacy activists and regulators. The company has often said that it does not share or sell details about individual users to advertisers.

Zuckerberg finds the privacy debate confusing and contrary to customer behavior. “We listen to all the anecdotal feedback, but we also look at the data of how people use the site,” he told a Silicon Valley conference this year. He’s seeing more, not less, sharing of personal information all the time.

If regulators don’t trust his word, perhaps they should trust the marketplace. For all the hand-wringing, 1 million people a day continue to sign up for the service, in 70 languages. And when activists staged a “Quit Facebook” day last May 31, only 37,000 people said they’d leave.